Census Data Understates Retirement Income of Wealthy

Their report analyzes whether the under-reporting of 401(k)/IRA withdrawals affects all parts of the income distribution or just among the higher income. Their analysis sorts households age 65-84 who are not working by total retirement income, including defined benefit income, Social Security benefits, investment income and “potential” 401(k)/IRA income.

Looking at the lowest quintile, the Census reports an average annual 401(k)/IRA income of $18 billion while the Fed’s survey reports $215 billion – a difference of $197 billion. In contrast, within the highest quintile, the Census’ survey and the Fed’s survey show a difference of $14,357 billion in average annual 401(k)/IRA income – with the Census reporting $1,827 billion vs. the Fed’s $16,183 billion.

“A cursory glance shows that dollar discrepancies are small until the two top quintiles,”  write Munnell  and Chen. “This finding is not surprising because the majority of households hold very little 401(k)/IRA assets.”

The government has responded, Munnell and Chen state, with plans to test different question patterns to try to improve responses and better incorporate all sources of retirement income.

Munell and Chen have a couple suggestions for them, though.

“The CPS may want to include a measure of 401(k)/IRA assets both to verify their income estimates and to calculate ‘potential’ defined contribution income in cases when households are not drawing on their retirement wealth,” they write.

Reported income from retirement accounts can fall short of potential for two reasons, Munnell and Chen say.

“First, individuals may not withdraw the money available to them. In fact, studies show that most retirees do not withdraw money until their early 70s when they become subject to the IRS’ required minimum distribution rules,” the pair write. “Second, the income that individuals actually do withdraw is not captured by the survey.”